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Imperial Oil Limited (IMO - Free Report) has made a name for itself as one of the leading integrated oil companies in Canada, having operations all across the hydrocarbon value chain. The company’s impressive diversified portfolio, strong financials and ramp-up activities bode well. On the flip side, Canadian infrastructural bottlenecks remain a major headwind. Let’s dig deeper to analyze the overall picture of the company.

Growth Catalysts

Integrated Business Model: Imperial Oil’s diversified portfolio of upstream and downstream assets is a major positive. The firm is a major oil sands producer, owning stakes at Kearl, Cold Lake and Syncrude assets. Additionally, the company owns an impressive portfolio of refineries, along with a network of around 1,800 retail service stations under Esso and Mobil brands. Alongside, the company deals with the manufacture and marketing of various petrochemicals.

This integrated business model of Imperial Oil provides it with a high level of stability, reducing the risk profile of the company. It also helps neutralize the impact of widening crude oil price differentials, which have been hurting the upstream segment of the Canadian explorer. In such a scenario, Imperial Oil’s downstream and chemical segments have acted as a booster for the company’s overall earnings.

Notably, in the last reported quarter, income from the downstream segment skyrocketed 157% year over year to stand at C$201 million. Also, net income from the chemicals segment recorded best-ever quarterly results, amounting to C$78 million compared with the year-ago figure of C$64 million.

Project Ramp-Ups: Imperial Oil successfully completed major maintenance activities at its key upstream assets, namely Kearl, Cold Lake and Syncrude, in the second quarter. This has positioned the company for solid production growth in the second half of 2018. Its 2018 oil output is anticipated to record an annual growth of around 7%. The company is ramping up its downstream and retail operations, which will further enhance its income and revenues. During the last reported quarter, the company completed its 72-day turnaround work at its biggest refinery, Strathcona. Imperial Oil’s recent deal with PC Optimum is likely to boost revenues at its Esso retail stations.

Balance Sheet Strength: The firm’s debt-to-capital ratio of around 18% increases its financial flexibility, aiding it to tap into strategic growth opportunities. Being a subsidiary of the world’s largest publicly-traded company Exxon Mobil Corporation (XOM - Free Report) , also gives Imperial Oil significant financial backing. Imperial Oil scores well in the free cash flow parameter, and remains strongly committed to return money back to investors via dividends and stock buyback. In the first quarter of 2018, the company declared a dividend hike of 20%, representing the 24th consecutive year of payout increase. During the second quarter, it renewed its share repurchase program to buy 40 million shares till June 2019, as a show of confidence in the company’s cash-generating ability. These investor-friendly moves further buoy shareholders’ optimism surrounding the stock.

Signs of Concern

Lack of Takeaway Capacity: Pipeline construction in Canada has failed to keep pace with rising domestic oil. This has forced the producers to sell their products at a discounted rate, thereby hampering its revenues. In addition, high breakeven costs associated with oil sands operations and refining of heavy crude limit the earnings of the company.

Hurdles in New Growth Projects: Prolonged delays in the company’s major oil sands project Aspen is also a headwind. The project has been under review for more than four years now, with the company still awaiting the final approval from Alberta Energy Regulator. Complex regulatory environment, soaring fiscal costs and market access challenges in Canada create a non-conducive environment for the company to plan out new growth projects.

Weak Earnings History & an Underperformer: Notably, Imperial Oil has a dismal earnings surprise history, having missed earnings in three out of the four trailing quarters, with an average negative surprise of 14.25%. What’s worse, shares of Imperial Oil have also underperformed the broader market in the past year. The stock witnessed an increase of just 10.3% in the said period compared with the industry’s rally of 31.7%.

Bottom Line

While we certainly believe that pipeline constraints in Canada will hamper the upstream profitability of Imperial Oil in the near term, the company should be able to counter the said limitation, courtesy of the downstream and chemical businesses. Notably, it carries a VGM Score of B and its 2018 earnings are expected to grow 92.8% on a year-over-year basis. As such, it is advised to retain the stock in your portfolio at the moment.

TC Pipelines’ 2018 earnings are expected to grow 18.67% year over year.

Petrobras delivered an average positive earnings surprise of 10.37% in the trailing four quarters.

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